Developer finds another way after banks say ‘no'

Sunday

Nov 11, 2012 at 12:01 AM

The green, white and gold sign out front announces that a Beef 'O' Brady's sports pub is coming soon. But, this one is special.

By Susan Latham CarrStaff writer

On the east side of U.S. 441 near Southeast 100th Place in Belleview is a site common only a few years ago, but rather rare today. Construction workers on scaffolding are putting the finishing touches on the exterior of a new building while tradesmen on the ground are slicing drywall for interior installation.

The green, white and gold sign out front announces that a Beef 'O' Brady's sports pub is coming soon. Like many temporary construction signs, this one lists who is providing the financing — but this one deserves a second look. The sign states the project is being financed by “Brian's Friends” and adds, with a sad-faced graphic, that banks would not loan them any money.

“I am the owner/developer,” Brian Ehlers said at the job site earlier this week. “In order to do that, I had to be really creative. I had to put together a partnership. Some of the subcontractors are throwing in their services as partners in the deal. It's better than sitting home.”

One subcontractor, for instance, provided about $10,000 worth of drywall.

“They did it because they do a lot of jobs for me,” Ehlers said.

Ehlers feels he has fashioned a good deal. With the help of his subcontractors, he is going to build and own the building. He will rent the building to an experienced restaurateur. He will split the rent he collects from the restaurateur with his partners in pro rata shares.

“It's a nice return on the investment,” Ehlers said.

Loans denied

Ehlers said he went to various banks to borrow money for the project, but walked away empty handed.

It is not as if his company, Brian Ehlers Construction Co. Inc., is a startup business without a track record. Ehlers built the stately Gateway Bank of Central Florida and the plaza that houses the Horse & Hounds Restaurant, both off East Silver Springs Boulevard in Ocala. He also built the Rasmussen College building off State Road 200 and a number of doctors offices.

But he found the banks he approached were not loaning for non-owner-occupied buildings.

“It's kind of always been classified as a little risky, getting a loan for building a new restaurant,” Ehlers said. “These days it's impossible.”

He said it would be much easier to get a loan if he were building an owner-occupied structure, such as a car dealership or a doctors office. Non-owner-occupied structures are leased by the owner to a tenant.

Bankers tend to agree that non-owner-occupied loans are more difficult to obtain, although they say there are many variables that go into a decision to give a loan or not.

Ehlers' bankers could not be reached for comment, but other bankers were willing to talk about the market, in general terms. Since they were not familiar with Ehlers' project, they could not address it specifically.

“In general, you have to look at the bankability of the project,” said Jay Musleh, vice president of Gateway Bank of Central Florida. “Owner-occupied is just so much more desirable now because we haven't gotten to the bottom of the commercial real estate market. Every bank has tons of renewals coming up. Most of the problems in banks are in non-owner-occupied real estate.”

Musleh said five or six years ago loans were made when some rents were $20 a square foot. Today, those same rents are coming in at $10 a square foot. And that, he said, is a significant difference. He said if rents are 50 percent of what they were, then the value is 50 percent of what it was.

“It's how much can I lease it for and what kind of income can I get off of it?” Musleh said.

He said it might also be a little easier to get a loan for a large national restaurant than a smaller restaurant.

He said regulators have always had targets for a bank's overall exposure in non-owner-occupied real estate like land loans and loans for retail shopping centers.

During the boom, a lot of that was ignored, he said. At that time, a bank could loan 400 to 600 percent of its capital for non-owner-occupied commercial loans. Today, that number is more like 300 percent of a bank's capital.

“It's something that's being paid attention to more,” Musleh said. “I think it's going to take time for things to get back to a more normal environment.”

George T. Durhan, CenterState Bank of Florida National Association's community president for Marion County, agrees with Musleh.

“I hope we don't ever return to 2006, but it would be nice if we could get back to some middle ground between there and here,” Durhan said about the economy's boom and bust.

He said although many areas of the economy are moving gradually in the right direction, it still feels like a recession in Florida.

He also agrees with Musleh that non-owner-occupied loans are considered risky and always have been.

“It's harder today for banks to get comfortable on non-owner-occupied or speculative lending than we were five or six years ago,” Durhan said.

If a bank loans to a doctor, attorney or small business person who will operate their business out of that building, the banker gets to know who the borrower is, gets their financial numbers and gets to know the owner's business model.

But if the bank gives a loan to a building owner, the bank may know the owner of the building, but it does not know the tenant.

“We don't know their history, performance or business model,” Durhan said. “Ultimately, the repayment of that loan comes not from the borrower's performance, but the performance of the tenant.”

Durhan said there is much uncertainty in the banking industry as they wait to see how the Dodd-Frank Act continues to unfold. “The repair to the economy is not going as fast as anyone wants,” he said.

Asked if the economy will pick up, Durhan said, “Ask our elected officials in January. It's completely in their court. We are really at their mercy now.”

Durhan said the elected officials, in the short term, can “move the needle” to make the economy better. But he said to live in a free market society, they have to back off and let the market correct itself.

“We don't know the long-term damage that is and isn't being done, and we won't know,” Durhan said.

Ehlers feels his project will be profitable. “The dollar value of what's going in versus what rent he is going to be paying makes it worthwhile,” he said about his tenant.

He got the idea for this job after fashioning a similar deal with Rasmussen. He bought the land and built the building, which he leases to the college.

Ehlers figures the restaurant's total project cost, including land, architects, engineers and even some of the kitchen equipment, is about $950,000, which is about 80 percent of what it would have cost him to build five years ago.

Ehlers said he paid $90,000 for the roughly one acre of land off U.S. 441. Two years ago, the land was under contract for $375,000, although that deal fell through. He said he has bought land when it was at the top of the market, so he was happy to get some at the bottom. And he said the city of Belleview is helping by waiving impact fees. He said about 175 people in various capacities have worked on the job.

He believes the 3,600-square-foot restaurant will be successful because Belleview does not have a sports bar.

“I think it's going to be a hit,” Ehlers said. So do his partners.

Chester Strader, who owns Willis Electric with Don Willis, likes the deal. “It was a good business decision on our part because it, ultimately, gave us some equipment that was available. It also helped us make an investment in the community,” Strader said.

He did take a risk, but he said it was a “considered” risk.

Strader said he likes Beef 'O' Brady's food, and it is a well-run operation. He knows and honors Ehlers, who, he said, comes from a long line of business folks.

“It was never a kind of ‘take a flier' risk,” he said. “It was one of those things we felt it was a risk worth the money.”

He said he will get liquid payments made over time and in three years will be out of the deal and will be able to use the money to invest in another program.

He said the banks got a government bailout but did not invest with businesses like theirs.

“I hope, in the future, that everybody takes a good long look at who had the money and who did what with it,” Strader said. “They could loan money. They chose not to.”

John Taylor, owner of JT Plastering & Stone, said he has faith in Ehlers, who he has worked with in the past.

“He builds a wonderful job and stands behind everything he does,” Taylor said. “He asked me if I would be willing to do that, and I told him I would.”

Taylor said he is buying his materials and paying his crew on the Belleview job.

“When it does start bringing in money, then I will get my return out of it,” Taylor said. “I told the guys we will all have to eat at Beef ‘O' Brady's to make sure everything is on the up and up,” he added, chuckling.

Including himself, Taylor has a crew of six, and they have been traveling all over Central Florida to keep working.

He said the banking industry “is messed up.” He said bankers earned commissions on the risky loans they made in the past.

“A lot of our economy now is because they are not lending,” Taylor said.